Porter's Value Chain Video

Value is at the heart of every business.

Your profit margin is the amount of value you can create, minus the cost of creating that value. So the greater the value and the lower your costs, the higher your profits will be.

Understanding how your company creates value, and looking for ways to add yet more value, are critical to developing a competitive strategy. Michael Porter discussed this in his book, "Competitive Advantage," in which he introduced the concept of the value chain.

A value chain is a set of activities that an organization does to create value for its customers. Porter proposed a general-purpose value chain that any company can use to examine all its activities, and to see how they're connected. You can use his model to ask yourself where you can increase value or reduce costs – or both.

Porter's Value Chain focuses on systems, rather than departments or accounting cost types. It divides the activities in your system into two categories – primary and support.

Primary activities relate directly to the creation, sale, maintenance, and support of a product or service. They include logistics, operations and marketing.

Support activities feed into one or more of the primary activities. They include human resources, procurement, and research and development.

According to Porter, primary and support activities can be broken down into three types of sub-activity – direct, indirect and quality assurance. Direct sub-activities can create value by themselves while indirect sub-activities help other activities run smoothly. Quality assurance sub-activities help other activities keep to the required standard.

Take a look at your primary and supporting activities, and break them down into their sub-activities. Identify which sub-activities could give you the most value. For example, a high-performing team is essential to creating an excellent product or service, so hiring, training and retaining exceptional people is a great way to add value.

Once you've done this, you're ready to add even more value. You can do this by finding links between sub-activities. For example, improving your order turnaround time means you'll spend less time, effort and money fielding phone calls from frustrated customers. You may be able to reduce your costs and retain your people for longer, while also making life easier for your customers. And convenience and a good reputation are both forms of value.

Porter's Value Chain is a useful strategic management tool for identifying where the greatest value lies in your organization and how you can increase it.

For more on Porter's Value Chain, read the article   that accompanies this video.